House committee gets details of NH's revenue problems

CONCORD — The fiscal showdown between Congress and President Barack Obama at the end of 2012 may be hurting New Hampshire’s and other states’ revenues.

State Department of Revenue Administration officials told the House Ways and Means Committee that fears of the “fiscal cliff” may have driven up interest and dividends, and business tax revenues last year, but is lowering returns this fiscal year.

The fiscal cliff along with changes lawmakers made in business and trust taxes when Republicans held huge majorities in 2011 and 2012 and the harsh winter could be responsible for the significant drop in revenues for March and April officials said, but said they would not be able to pinpoint the reasons until the end of the calendar year.

“There are a lot of moving pieces,” said Lindsey Stepp, financial analyst for the DRA, but she noted “other states are reporting corporate tax collection is down for the first quarter.”

State revenues were ahead of what lawmakers believed they would produce by about $25 million until March, when business taxes were off by $3 million and April when they were off by $11 million, both months when significant business taxes are collected. During April, the interest and dividends tax was $9 million below projections, or down 22 percent.Department of Administrative Services Commissioner Linda Hodgdon said at the time, she had never seen such a drop in the interest and dividends tax.

Despite the lower returns, state revenues look to be right about on target for the 2014 fiscal year, said Senate President Chuck Morse, R-Salem. “Even in the worst-case scenario, we are within a couple million dollars. Our concern is about the expense side.”

During the 2011-12 legislative sessions, lawmakers increased the amount of loss a company can carry forward as a credit against taxes owed in the future, raised the threshold for having to pay the business enterprise tax and eliminated a cap on what a business owner could claim for compensation.

While many of those changes have had little effect on revenues this year, more impact is expected in future years, Stepp told the committee.

Putting the burden of proof on the DRA to challenge what a business owner claims as compensation versus profit has had an effect, she said, as have raising the threshold, which has reduced the number of proprietorships and partnerships filing returns.

Mindy Cyr of the DRA said when the law was changed, so did the assumption. Now compensation is presumed to be reasonable unless an audit indicates otherwise, she said.

Committee member Rep. Dick Ames, D-Jaffrey, asked how many cases has the department challenged, and Cyr said she was not aware of any.

Committee chairman Rep. Susan Almy, D-Lebanon, asked how much revenue collected through tax notices, which includes compensation claims, had changed.

According to the department, notice collections were $43.4 million in fiscal 2010, $47.5 million in 2011, $26.5 million in 2012 when the law changed, $27.4 million in 2013 and $24.5 million this fiscal year to date.

A change in how trusts are taxed in 2012 could be affecting the interest and dividend tax, Stepp told the committee. Lawmakers changed the state’s trust laws so that trusts established by an entity or person who gives up the right to the principal or what are called nongrantor trusts would be exempt from the interest and dividends tax.

The change no longer taxed dividends that remain in the trust and limit liability to trustees who are paid dividends.

Stepp said the change and the concerns over the fiscal cliff in 2012 could be affecting revenues this year.With the nation poised to go over the “fiscal cliff,” high-income investors and corporations sold their stock or reported income early to avoid what they believed would be higher taxes in 2013.

Many states saw record business tax revenues, interest and dividends, and income tax revenues last fiscal year, but are experiencing reduced revenues this fiscal year.

Insurance tax bonus

Budget writers received good news from the Insurance Department, which expects the insurance premium tax to produce more money than anticipated.

Insurance revenues are projected to be $95.2 million, $8.3 million more than estimates due largely to increased purchases in property and casualty insurance and $1.3 million from premiums for the state managed care Medicaid program.

Next fiscal year, which begins July 1, lawmakers expect a boost of $16.8 million from the managed care program and $2.15 million more from expanding Medicaid eligibility under the Affordable Care Act.Department officials said they expect revenues for fiscal 2015 to be $113.65 million, or $4.15 million more than anticipated in the biennial budget.

The Ways and Means Committee is not expected to adjust its revenue estimates for 2015 until later this summer.